By Simon Boughey

Our latest look at new entrants into the derivatives market has uncovered three ambitious efforts: IPI’s Scrittura is trying to automate the last link in the trading process—confirms. Xenomorph’s new data suite is tackling the problem of integrating pricing models with historic and real-time data. And Optional Knowledge’s SPEDE is trying to speed up the often tedious process of constructing new exotic derivatives models.

Every so often, one comes across an area of the finance industry that has been relatively unaffected by the technological revolution. Open-outcry trading is the most obvious example, but trade confirmation is mired in a similar backwater. Scrittura, the new automatic document-generation and process-tracking system from Intuitive Products International, is designed to take the whole process into the 21st century.

At most trading desks, a dealer writes out a trade ticket and the deal is entered manually into the in-house trade-capture system. Then the confirmation has to be generated manually once again by documentation personnel. Angela Mia Colasuonno, director of derivative products at IPI, points out that this sequence of events is slow and prone to human error.

IPI hopes Scrittura can change all that. Once Scrittura is bolted onto a trade-capture system, it is possible to automate the entire confirmation process so that a trade is confirmed soon after it’s booked into the system. The system also tracks trades and provides relevant real-time management information—details such as whether a trade is signed or not, whether it has been sent to the counterparty, and whether it has matured yet. Documents can also be created in New York and viewed on-line in London, thus reducing paper clutter and costs. Scrittura provides standardized documentation for deal types, whether a deal was generated and captured in London, New York, Tokyo or any other location.

Scrittura also has an internal rule- and template-based document generator that cranks out detailed confirmations using basic templates and rule logic. In most cases, these confirms can be maintained by the documentation personnel without the need to involve IT staff. The system uses ISDA-based templates for many product types, including interest rate swaps, cross-currency swaps, caps and floors, forward rate agreements, swaptions, credit default swaps and equity options.

IPI began life in 1991 as a consulting firm and still functions as one, but it saw the need to create a system that would integrate, automate and control all procedures surrounding documentation production and control—particularly relating to confirmation generation and tracking. The firm was founded by president Jos Stoop and now has 30 employees, 20 of whom are based in the head office in New York. It also has a London office and an administrative center in Connecticut.

Scrittura can be bolted onto whatever in-house system is being used for trade capture. In order to be compatible with as many existing environments as possible, Scrittura uses intranet browser technology for platform independence, and its components use HTML, Microsoft Word, Java and SQL. It is also scalable, so it can be used in both low- and high-volume trading environments. And although it was designed to handle derivatives confirmations, it can also be used for more complex transactions such as medium-term notes and other structured notes.

Although Scrittura has only been available since the end of last year, it has already signed up Societe Generale’s fixed-income group in New York, which is about to go live. It has one other pilot program ongoing, and hopes to get another four up and running in the near future.

Although automating the trade confirmation process might inspire documentation personnel to dust off their resumes, Colasuonno claims it is more likely they will be freed up to work on more exotic transactions.

For more information, contact Angela Mia Colasuonno at colasuonno@ipicorp.com.

Picture four old college buddies, deciding to ditch their regular jobs and start their own business in a rambling old house. By the fourth year, the business begins raking in a million pounds a year. Surely this happens only in movies, right? Wrong—the Hollywood scenario actually happened to four Imperial College, London, graduates who quit their jobs in 1995 to form Xenomorph, a front-office data management and analysis system based in Wimbledon.

Before setting up Xenomorph, all four worked in the financial services industry: One was a quant at Bankers Trust, another was a techie at Logica, the third was a quant in the equity derivatives group at JP Morgan and the fourth traded equity derivatives at ING Hong Kong. They agreed that one of the most intractable difficulties facing derivatives trading desks was the long turnaround time for integrating new pricing model analytics with historic and real-time data in risk management and data analysis systems. Their new system was designed to address this problem.

Marketing director Brian Sentance describes Xenomorph as a suite of products that allows “storage, integration, distribution and analysis of trade data.” However, it is not a pricing tool, and Xenomorph doesn’t supply data. Instead, the product suite is designed to make it easy for risk managers and derivatives traders to link together a variety of supported market data feeds with in-house and third-party option analytics. This allows rapid derivation and storage of key trading data such as historic implied volatilities and historic zero curves.

One of the key components in the product suite is the Xenomorph Data Explorer, which is designed to allow easy viewing and manipulation of data sources and databases, without sacrifices to database power or flexibility. A risk manager or trader can use Data Explorer to visually design complex data structures to support new derivative instruments without the need for programming or SQL experience.

Data Explorer makes use of the proprietary native Xenomorph DataBase (XDB) format. XDBs can store a comprehensive amount of historical and nonhistorical data, such as prices, yields, correlation matrices, basket compositions, volatility surfaces, yield-curve definitions and regions of Excel spreadsheets. XDBs are designed for the highest possible performance in storing and retrieving time-series data—data that Xenomorph classifies as historic storage of any shape of financial data, not simply numbers for prices and yields.

The maximum size of a single native XDB is 95 gigabytes, and there is no limit to the number of instruments that can be stored in one database. This disk storage is used extremely efficiently, needing only a 1-GB XDB to store 300,000 years of daily price data.

Xenomorph argues that although the bigger shops are more likely to use large relational databases such as Oracle or Sybase, for time-series data (date/value pairs), databases such as these are not always the best storage medium. Access times to time-series data can increase tremendously as new instruments and their histories are added to the database. Xenomorph tries to get around this problem by offering high-speed access at all times, a task it was specifically designed to do.

During the first 18 months of its existence, the company was based in an old house in South London and funded by the four directors themselves. Now it employs 20 people and anticipates that 1999 turnover will be in the region of 1 million pounds.

Xenomorph’s first client was Bankers Trust, and it now has 11 clients and 20-plus sites. Newer clients include General Re Financial Products, ING and Rabobank. Sentance admits, however, that potential clients are more likely to be smaller hedge funds and boutiques such as Tokai Asia and Wharton Investment Management in Hong Kong that do not have large IT departments. “A lot of traders at smaller shops like those often do the IT themselves. We can give them a head start on the competition,” says Sentance.

In the next few months, Xenomorph will add interfaces that provide historic yield-curve analysis using models from Tech Hackers, FinCAD and other vendors, and deriving implied volatility surfaces from Liffe’s option data. Another key module is a trade-capture and risk management system that integrates the best aspects of instrument data storage in Xenomorph Databases with the storage of transaction and position data in the Microsoft SQL Server.

The Xenomorph system can also be used to access directly market data feeds such as Bloomberg, Datastream, FactSet and Reuters. Others are in development. It has interfaces to Excel, Visual Basic, C/C++ and Microsoft COM. The system runs on the Microsoft Windows NT operating system, versions 3.51 and 4.0, and will support all future versions of Windows NT.

For more information, contact Brian Sentance at bsentance@xenomorph.co.uk.